Malta Pension Plan – IRS Knocks It Out.. and Yes, “I Told You So…..”

Just in time for Christmas, we have two big gifts.

Both relate to Malta Pension Plan schemes. If you are too busy to read the post because of the Christmas rush,  in a nutshell, they’ve just been knocked out and the Internal Revenue Service (IRS) is hot on the trail for taxpayers who used them!

First, improper use of the the pension provisions of the United States-Malta tax treaty (“Treaty”) is now at a grinding halt with repercussions to follow.  The competent authorities of the United States of America and the Republic of Malta just signed a Competent Authority Arrangement (“Arrangement”) regarding the definition of the term “pension fund”  for purposes of the Treaty. The Arrangement was implemented in order to stop US persons from creating and using personal retirement schemes in Malta to improperly claim Treaty benefits.  Typically these US taxpayers had no connection to Malta and were misconstruing the pension provisions of the Treaty simply to avoid income tax on the earnings of, and distributions from, personal retirement schemes established there.

Second, the IRS has now announced that it is actively auditing taxpayers who have set up “pension fund” arrangements using the Treaty.  You can read more detail about the Arrangement and audits to come at the IRS announcement IR 2021-253 December 21 2021.  IRS urges such taxpayers to consult an independent tax advisor prior to filing their 2021 tax returns and to take appropriate corrective actions on any prior tax return filings that claimed Treaty benefits. In other words, the jig is up.

The “Naughty” List

The targeted “pensions” had no limitation based on earnings from employment or self-employment, and individuals were making contributions to these “pension” plan schemes in forms other than cash (e.g., securities, crypto, shares in start-ups).  Some US tax advisors were recommending use of these schemes.  I, along with other more circumspect tax professionals would not work with such plans and cautioned against their use because in our view it was doubtful that these personal retirement schemes would be treated as “pension funds” in substance, for purposes of applying the Treaty. And, yes, we were right ….

Competent Authority Arrangement Brings Coal for Christmas

The entire text of the Arrangement is here and relevant portions of the Arrangement are quoted below:

“The competent authorities confirm that a fund, scheme or arrangement established in a Contracting State that, except in the case of a qualified rollover from a pension fund established in the same Contracting State, (a) is allowed to accept contributions from a participant in a form other than cash, or (b) does not limit contributions by reference to earned income from personal services (including self-employment) of the participant or the participant’s spouse, is not operated principally to administer or provide pension or retirement benefits within the meaning of paragraph 1(k) of Article 3 of the Treaty, and is therefore not a ‘pension fund’. The competent authorities therefore also confirm that distributions from this type of fund, scheme or arrangement are not “pensions or other similar remuneration” in consideration of past employment for purposes of paragraph 1(b) of Article 17 of the Treaty.

Accordingly, U.S. citizens and residents may not claim benefits under paragraph 1(b) of Article 17 and Article 18 of the Treaty with respect to the type of fund, scheme or arrangement described in the paragraph immediately above, including a personal retirement scheme established in Malta under the Retirement Pensions Act of 2011. Additionally, these funds, schemes or arrangements may not apply paragraph 2(e) of Article 22 of the Treaty to be treated as a qualified resident and may not claim the benefits of paragraph 3 of Article 10 of the Treaty. The competent authorities confirm that the interpretation in this Arrangement reflects the original intent of the Contracting States regarding the definition of ‘pension fund’ for purposes of the Treaty.”

Audits on the Way

The Malta Pension Plan schemes were hot with quite a few wealthy Americans since promoters claimed they could slash tax bills by making clever use of the Treaty.  Here’s a blog post from 2017 by an advocate of the Malta Pension Plan Supercharged XBorder Roth IRA and how the Treaty could save oodles of tax dollars.

Hmmmm, not so and persons who used these schemes will now have to deal with an IRS audit.   The bottom line is that the purported benefits of Maltese pensions in personal schemes that disregarded certain principles (such as not limiting contributions or permitting contributions of assets such as crypto or shares in start-ups) were not intended by Treasury in negotiating the Treaty and therefore the use of “pensions” in this manner is indeed “too good to be true.”

Posted December 22, 2021

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